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Robert Edwards
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Contrarian daytrading technician who specializes in locating high probability short term trades while predicting price movement directions with over 85% accuracy. Most of my trading involves either extremely short term micro scalping of stocks or commodities (using 1 minute bar charts), or swing... More
  • Balloon Theory: A New Way Of Looking At Trading Charts, Part 1, An Introduction 3 comments
    Feb 23, 2014 1:18 AM | about stocks: DIA, DGAZ

    In this article I am going to describe a new, quite original, way of looking at charts. I created this all myself. You won't find out about this anywhere else. I call it balloon theory. When looking at a chart of stocks or commodities, I have devised a way of identifying which of 5 types of balloon, the stock or commodity is performing like. Every balloon type has rules of trading that best fit that type of market. Markets switch from one balloon type to another, about every 1 to 3 weeks. By realizing when a market is turning from one balloon type to another, one can anticipate future price action in the stock or commodity and place trades that will hopefully be quite profitable. There are 5 types of balloons. I will describe each type and provide chart examples.

    Balloon Type # 1: The Lead Balloon

    When a market is dropping straight down for several days in a row, this is called a lead balloon. A good example of a lead balloon market is found in the following daily chart of June 2014 Palladium:

    (click to enlarge)

    The last 6 trading days of January 2014 and the first 2 trading days of February, Palladium closed lower for 8 straight days. It started with a long black candlestick that was followed by another long black candlestick the second day, and so on for several days. The moment the second day Palladium began falling further, one should have gone short the Palladium market and stayed short until there was an up day. One would have made money on days 2 through 8, Then on the 9th day, we finally got an up day. That first up day occurred on the 3rd trading day of February 2014. A basic rule of trading a lead balloon market is to get short when support is broken and stay short until the first up day. The more consecutive down days the better. There should be at least 5 hard down days in a row, but here there were 9. Also, you have to be careful because sometimes there are 4 to 5 down days, one big up day and another 4 to 5 down days. However, when the total days down reach 8 out of 9 days, or 9 out of 10 days, one can be quite confident in going long on the first up day. Yes, when you finally see you are getting an up day, take your profits on your short position, and then go long!

    If the next day is also up, then the bottom is indeed confirmed and one should probably buy again, and again for several days running. What is most amazing about lead balloon markets that fall straight down, is that they are often followed by markets that go straight up! And what are those markets called that go straight up? Well, they are called helium balloon markets, of course. In the above chart, as soon as the lead balloon market ended, it was followed by a helium balloon market where prices went virtually straight up. During helium markets, one can stay bullish and keep adding contracts (or shares when trading stocks) while one waits for a long black candlestick. You will notice that in the above chart, in 12 days we have a couple days where we closed lower but not a single long black candlestick. One should therefore remain long.

    Another example of a lead balloon market is found in the following daily chart of March 2014 copper, as it fell hard for nine straight days from the middle of January 2014 to the first trading day of February 2014. The chart is below:

    (click to enlarge)

    Since this chart has all the five balloon types on it, I will quickly cover each one starting at the left side of the chart. At the beginning of the chart, copper is caught in a trading range that I have labeled turbulence or noise. During sideways, non-trending markets, one can buy at the bottom of the range, and sell at the top of the range, waiting for a breakout either up or down. In this case the market broke to the upside starting with a very large white candle. Then after a miner correction day doji, the market went straight up for 7 straight days. By the 3rd or 4th day, one should have definitely realized we were rallying through the top end of the trading range and gone long copper and continued to ride copper while waiting for a long black candlestick. After 7 straight up days there were two lower closes but they were not long black candles. The 3rd down day we finally got a significant black candle that concluded flight #1. But what occurred next, is quite typical of helium type markets, you get an extension of flight #1 for 3 or 4 days, which I call Flight 1-A. The "A" stands for Added or Additional days. Here we went up 4 additional days and one would want to be long to catch this additional move to the upside.

    Then from the top, one started going sideways with a downward tilt. A stairstep move down, with long white and long black candles frequently seen, is called a descending hot air balloon market. Here in copper this went on till the 7th trading day before the end of January 2014, when a long black candle broke support. This was a major sell signal and began what turned out to be 9 consecutive down days, a classic lead balloon market. And what should one do on the first up day? You got it! Take profits on the short position and go long! After the first up day, the next day closed slightly down but it was a gravestone doji and not a long black candlestick, so one should have stayed long until the 3rd day which confirmed the upturn with a long white candle. The 4th day out of the bottom was also white. Then we had a two day correction as we would expect from an ascending hot air balloon market. For brevity, I marked it as a hot air up market on the chart. Since that small two day correction, copper has continued rising with no long black candles in sight! What started out as an ascending hot air market is now a full-fledged helium balloon market.

    Balloon Type #2 & #3: The Descending Hot Air Balloon And The Ascending Hot Air Balloon

    When a market goes down in measured stair-step fashion, it is called a Descending Hot Air Balloon, and when a market goes up in measured stair-step fashion, it is called an Ascending Hot Air Balloon market. If you ever rode in a hot air balloon, it does not go straight up or down as one can catch various air currents or drafts, and one can give bursts of heat to rise over obstacles, or cut the heat back to drop back down. A good example of each can be found in the daily chart of the March 2014 10-Year Note shown below:

    (click to enlarge)

    In the above chart, a horizontal line is drawn every 8/32nds of a point. At the left side of the chart, one will notice how every support level that was broken, we would drop 3 lines or units lower and then bounce until we finally hit bottom. Also, from the first rally, we fell 7 units down, rallied and then fell 8 units, rallied again and fell another 8 units. This all occurred as part of the descending hot air balloon market. And what happened the moment the descending hot air balloon market ended, it found its mirror image, the ascending hot air balloon market. Even though we found support every 3 units on the way down, on the way back up, we rallied 3.5 units, 3.5 units, 4 units and 4 units until we topped out. Most recently we are now caught in turbulence or noise. The current trading market is 5 lines or units wide. If we breakout to the upside, one should go long, and if we breakout to the bottom side, one should go short.

    Balloon Type #4: The Helium Balloon

    (click to enlarge)

    The above daily chart of the E-mini Dow Jones, is an excellent example of the Helium Balloon chart. Starting at the left side of the chart, we begin with 8 white candles as part of Flight #1, a true helium balloon market. Then on the 9th day, one sees the first long black candle. That is the warning, the shot across the bow, that the uptrend will end during the next 3 to 4 days. With so much momentum to the upside, after one down day traders were anxious to buy on that first dip, and just as expected, we rallied for 3 more days, marked as 1-A on the chart, the added 3 days of flight #1. To be safe, the rule is to take profits on the 3rd day following the first long black warning candle in a helium market. After a couple low range sideways days, the Dow fell for 5 days, creating a lead balloon market, and then had one up day. With all that downward momentum, traders were anxious to take profits when a strong up day finally occurred. And then we had another 4 down days, completing the lead balloon market fall of 9 out of 10 days. At that point we finally got an up day and you know the rule by now. When a lead market is identified, one should buy on the first up day after several consecutive down days. Here it would have worked fabulously. Following the first small up day, the second day was a large white candle, confirming the change in trend, and one should have added to their long position. Then after a doji candle, slight down close but not a long black candle so no problem, the following day was an extremely long white candle and it was apparent we had switched from a lead balloon market to a helium market. This helium market consisted of 12 up days before a long black candle was found on the 13th day. The next 3 days were up, down and up, so one would have gotten out perfectly again 3 days following the warning long black candle.

    We then went sideways for several days, which I have marked on the chart as "noise". Then in late January we broke down below support and one should have gone short as we began a lead balloon market consisting of 4 down days, an up day, then another 4 down days. At the bottom, we finally got a small up day and you know by now what to do, right? On that first up day you take profits on the shorts and go long. From the lead balloon market we turned immediately into a helium market consisting of ten mostly up days without a long black candle. On Wednesday of this week, we finally got the warning of a top, long black candle. We have now traded 2 days following the warning long black candle so since Monday is the 3rd day, the rules would dictate that one take profits on this coming Monday, and sit back to see if we go sideways for a few days and then start up again, or we switch to a down market.

    Balloon Type #5: Turbulence Or Noise

    (click to enlarge)

    The above daily chart of June Lean Hogs, best illustrates the last balloon type, "turbulence" or "noise". Starting from the left side of the chart, we were caught in a tight trading range that went on for at least 9 weeks. We went up a few days, and then back down, with no real pattern and never making much progress. After such a long period of sideways action, the move that would finally occur should be powerful, and it was. As the middle of January 2014 approached, we started moving higher and broke out of the top of the trading range. By the 2nd or 3rd day of the up move, one should have gotten long June Lean Hogs. The helium balloon pattern lasted for 13 days, and is marked as flight #1 on the chart. That 13th up day was a real doozie, a very long white candle. It was followed by the first long black (warning of a top) candle. Then counting 3 days out, what was flight 1-A, one would have sold out of their long position perfectly at the top. Then after 4 more days of correction, we started up again, marked as flight #2 on the chart. This helium balloon market has lasted 6 days and continues on. I am currently long April Lean Hogs and awaiting that first long black warning candle. I will then count 3 days later and get out of my very profitable long positions.

    Summary:

    I have marked several more charts and will include then in Part 2 of this Instablog. As many are interested in what is going on in natural gas, I will finish with the daily chart of May Natural Gas Futures:

    (click to enlarge)

    Starting at the left side, we had a 6 day helium balloon market before we got a warning long black candle. It is marked as flight #1 on the above chart. On the 3rd day following the long black candle, if one had sold, you would have caught the top. But after 2 down days, natural gas started up again for 16 trading days. This helium balloon market is marked as flight #2 on the chart. If one had sold on the 3rd day after the warning long black candle, one would have again perfectly caught the top. What happened next is we went sideways for a couple weeks, marked as noise on the above chart. Then there was a breakout to the downside which our rules say we should have gone short Natural Gas or in our case, maybe bought the triple leveraged bearish natural gas ETF (NYSEARCA:DGAZ). The down move lasted only 4 days and only a couple days were after the support was broken. This turned out to be a false breakout to the downside as natural gas turned higher and it has not stopped rising. We then completed a 9 day helium balloon market, marked as flight #3 on the chart. After the warning long black candle, instead of one 3 day extension higher (marked as 3-A), there was another 3 day extension (marked as 3B on the above chart). After a 4 day correction, we have started up again, but this 4th flight is back and forth in a stair-step fashion with both long white and long black candles, so I have marked it as a rising or ascending hot air balloon market. We are so extended to the upside being on the 4th flight higher without a significant correction, one would assume that a top would be seen shortly. The fact that we have switched from a helium market to an ascending hot air balloon market shows that we are losing upward momentum. However, it is too soon to call a top and we will have to wait to see what transpires next.

    Disclaimer:

    The thoughts and opinions in this article, along with all stock talk posts made by Robert Edwards, are my own. I am merely giving my interpretation of market moves as I see them. I am sharing what I am doing in my own trading. Sometimes I am correct, while other times I am wrong. They are not trading recommendations, but just another opinion that one may consider as one does their own due diligence.

    Stocks: DIA, DGAZ
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Comments (3)
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  • Growfast
    , contributor
    Comments (273) | Send Message
     
    Quite interesting read, Rob. Thanks!
    23 Feb, 01:42 PM Reply Like
  • GJN
    , contributor
    Comments (52) | Send Message
     
    Very interesting indeed. TY for posting!!
    23 Feb, 02:51 PM Reply Like
  • Growfast
    , contributor
    Comments (273) | Send Message
     
    Looks like the NG chart being shown as front month today, reflecting the Apr contract, may be showing us a huge black candle, 6.2 down to 5.012. Should be interesting to see the action on this candle in the am.
    23 Feb, 02:55 PM Reply Like
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